Capping energy prices is economically illiterate and will hurt consumers

“It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest.” – Adam Smith

These are as true today as they were when Adam Smith first uttered them almost two hundred and fifty years ago. It is no doubt true that the nation’s energy suppliers do not heat our homes and power our appliances out of the goodness of their hearts. They do this because they can make a profit. This is not a dirty word. It certainly does not make them evil. Indeed the pursuit of self-interest is the natural way of things.

To state the obvious, when you have a competitive market suppliers have to compete for your custom. They do this by constantly innovating, by striving to improve a better service, by providing incentives for loyal customers and so forth. With regards to price competition works. Think about it logically, if a supplier prices too high it opens itself up to be undercut and thus becomes less competitive. This is the most basic of basic economics. A ten year old could observe this. It turns out then that the pursuit of self-interest actually leads to a good outcome for all of society.

We are seeing the free market work its magic in the energy industry. The new challenger brands which have come in the last few years have shaken up the market. Britain’s biggest suppliers “The big six” portrayed as the epitome of all things evil by much of the mainstream media, have struggled compete with this new reality. Yes British Gas remains the country’s biggest supplier but it is bleeding customers so fast that it may soon need some sort of transfusion. In the past couple of years the company has averaged a loss of over one thousand customers per day!

The free market then is undoubtedly working. You would not know that however if you listened to all of the nonsense coming out of the two main political parties. Watching Theresa May’s government legitimise some of the Ed Miliband’s worst ideas is truly painful. It seems demagoguery is corrupting all of our political leaders.

Intervention in the energy markets as often is the case with state intervention, will lead to a worse outcome for consumers. With prices set by the state the incentive for suppliers to compete for our custom will be greatly diminished. Competition, the driving force behind investment and innovation will effectively be killed off.

Now it would be wrong for me to end this post here without addressing the argument for market intervention i.e. the gap between the lowest price energy tariffs and the most expensive. It is true that there is a significant difference between the two. It is not however true that this is a failure of the market. This is simply a failure of enough of us as consumers to shop around for the best deal. I fail to see how this is different from any other industry. As with anything else we spend our money it is our responsibility as individuals to ensure we shop around for the best deal. It not the responsibility of the nanny state to do this for us.